Cracking the Emerging Markets Enigma

G. Andrew Karolyi

Abstract

This book develops a new practical framework to delineate and measure the fundamental risks of investing in emerging markets. In so doing, it defines clearly what an emerging market represents: namely, an undercapitalized and thus not-fully realized growth opportunity with complexities. These complexities are what inhibit global investors from helping to remedy the undercapitalization problem and they reflect institutional fragility that stems from market capacity constraints, operational inefficiencies, foreign investibility restrictions, corporate opacity, limits to legal protections, and po ... More

This book develops a new practical framework to delineate and measure the fundamental risks of investing in emerging markets. In so doing, it defines clearly what an emerging market represents: namely, an undercapitalized and thus not-fully realized growth opportunity with complexities. These complexities are what inhibit global investors from helping to remedy the undercapitalization problem and they reflect institutional fragility that stems from market capacity constraints, operational inefficiencies, foreign investibility restrictions, corporate opacity, limits to legal protections, and political instability. The book’s practical aspect stems from the creation of standardized indexes associated with each of these fundamental risks that are built applying well-known statistical techniques to data from hundreds of rigorous academic research studies and publicly available sources on relevant country attributes. To validate the practical usefulness of these indexes of fundamental risks in emerging markets, the book offers out-of-sample forecast evidence for emerging-market portfolio holdings of global investors and even for portfolio flows during 2013, when an announced shift in US Federal Reserve policies inspired significant global portfolio outflows from many emerging markets.

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